The Benefits of VMI for CPG Supply Chains

Increasing supply chain efficiency is crucial for every consumer industry, from fashion to farming to technology. Consumer Packaged Goods (CPG) are no exception. Research from management consulting firm Kearney indicates that CPG companies relying on inefficient legacy supply chain operating models could lose $800 billion in growth by 2027. The impact of supply chain inefficiency on manufacturers, suppliers, and retailers is powerful.

For retailers, capricious market demand makes replenishment and supplier collaboration more complicated than ever. One way for retailers and their suppliers to take back control is with Vendor Managed Inventory (VMI). VMI is a collaborative approach to inventory management in which the manufacturer or supplier assumes responsibility for monitoring the distributor’s stock position and replenishing their product based on the two parties’ mutual goals and objectives.

When done right using a top-quality VMI software provider, both parties win and enjoy increased sales and improved inventory turns. Using VMI can also lower transportation costs, providing better service to customers. Learn more about the benefits of managing your CPG products supply chain with VMI.

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Learn More: How VMI Helps Reduce Outbound Transportation Costs for CPG Companies

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Transparency Is Key to Replenishment

To adapt quickly to changing customer demands, manufacturers, retailers, and suppliers need transparency and visibility across their supply chains. Knowing exactly what you need to replenish to keep shoppers happy is a prerequisite for success. Yet keeping the right products on a shop’s shelves and replenishing them on time is challenging.

Cooperation and commitment are the main drivers behind transparency, followed by the right support from your trading partners. As customer needs change week-to-week, grocery stores and other retailers need solutions for sharing inventory data with their suppliers. Gaining a glimpse into distribution partners’ data enables IT directors and supply chain managers at CPG companies to outperform competitors by reacting more quickly and decisively to customer demand.

Benefits of Using VMI for CPG

Implementing VMI for CPG products enables companies to replenish inventory collaboratively, letting demand drive more optimized supply chains. Here are a few of the most significant benefits of using VMI with CPG companies:

Streamlined Order Replenishment

Customers can’t buy what isn’t on the shelf. On-shelf availability of CPG products is crucial for meeting customer needs. Yet retailers may sometimes be too overwhelmed by other issues like supply chain disruptions to focus on proactive replenishment. Grocery store supply chain managers and their suppliers need all the data they can get to make these tough decisions, which is where VMI can help.

VMI encourages data sharing between retailers and their vendors, so vendors can quickly understand how fast a product is moving and ensure that new products hit the shelves quickly to minimize stockouts. VMI software streamlines the process by automating data transfer and using “rules” chosen by vendors to determine how much stock needs to be replenished and when it needs to be delivered to keep up with demand.

Options like allocation take collaborative replenishment solutions to the next level by integrating a supplier’s inventory availability and any existing shortages into account. With this knowledge in hand, suppliers can prioritize their inventory to meet the needs of their most critical locations and customers. One study found that the locations using VMI saw a 31% average reduction in stockouts and a 24% average increase in sales, demonstrating the value of VMI for CPG supply chains.

Simplified Order Handling

Because retailers don’t need to create orders when using VMI, order handling becomes a much smoother process. Instead of having to input a new order every time, the replenishment system prompts the supplier to validate automatically created orders based on a variety of signals which the retailer provides. This technology automates replenishment orders and reduces the burden on suppliers.

Because managing CPG products with VMI requires the supplier and retailer to share inventory information, the supplier spends less time correcting or adjusting orders. This is a considerable time-saving benefit. With fewer hours spent on “touching orders,” both parties gain time to focus on value-added activities and a joint strategy.

Reduced Transportation Costs

Transportation costs are one of the top worries on many CPG producer and retailer minds. The producer price index of freight trucking indicates that costs are trending upward. With customers expecting fast shipping for a range of goods like consumables and household items, suppliers need strategies for maximizing shipments and controlling costs.

VMI might not be a cure-all for rising transportation costs, but it can help with creating optimized truckloads, minimizing LTL shipments, and reducing capacity costs. Built-in intelligence lets vendors optimize shipments for maximum vehicle fill rate (VFR), always using the next most-needed SKUs to ensure vital products hit the shelves first. Improving VFR enables fuller loads and fewer trucks on the road.

The solution can even combine non-VMI open orders with the most recently generated VMI orders to drive further transportation savings by consolidating shipments. VMI maximizes retailers’ and suppliers’ ability to maximize on-shelf availability while reducing transportation costs and overall truck and driver demands, which can help stabilize shipping rates.

Fewer Returns

Returns add cost, waste productivity, and strain vendor-retailer relationships. For suppliers, handling returns means losing valuable time responding to demand changes, and those changes might make reselling returned items more difficult, leading to even greater losses. For retailers, sending returns and waiting for new products can result in empty shelves. Minimizing the headache of frequent returns is vital for improving supply chain efficiency.

Incorrect product assortments, poor ordering behavior, a lack of data sharing, and demand swings all contribute to increased returns. Trying to control the process manually could lead to even more mistakes. Collaborative replenishment with VMI combines retailer information with supplier information, such as product life cycle, lead time, package size, and item numbers, to create more efficient orders. By working together, the supplier and retailer can remove excess inventory from the channel and reduce their returns.

Protection Against Recessions

Using VMI for CPG products can also help retailers and suppliers prepare for recessions. Excess stock ties up cash that retailers can’t afford to lose. While grocery store supply chain managers typically set aside a certain amount of safety stock to minimize lead times, poor forecasting could lead to excess inventory that causes retailers to lose money if customer demand plummets.

Ensuring full shelves to maximize sales while limiting overstock is critical during a recession. Fortunately, VMI enables grocery stores to avoid overstocking and reduce their safety stock. VMI strikes a balance between overstocking and understocking by recommending orders based on demand. This proactive replenishment model quickly identifies shifts in customer demand to improve forecasting and cut lead times.

Learn More About Our VMI Solution

The importance of supply chain visibility and collaboration is clearer in today’s market than ever. Using VMI to work directly with your suppliers is just one more way you can ensure your customers have access to the products they need. The beauty of supplier collaboration is that it helps give you stability in times of need and ushers in new growth and increased profitability.

TrueCommerce’s VMI solution increases visibility, trust, and collaboration between suppliers and retailers by aligning business objectives and improving operations. The TrueCommerce solution is built to scale to any number of locations and support any inventory replenishment model, so your VMI solution grows with your business.

If you are new to the idea of VMI, or aren’t sure if your current VMI program is working for you, we encourage you to reach out to our VMI experts to discuss your needs. You can also learn more about collaborative replenishment in our What is VMI? guide.